Bank Statement Reconciliation

Bank Statement Reconciliation

Bank Statement Reconciliation
Bank Statement Reconciliation

Bank Statement Reconciliation

Reconciling your bank statement involves comparing your bank account transactions, balance, fees, and interest earned with your own transaction records to uncover any discrepancies or unauthorized activities. Completing this simple accounting process each month ensures your books match the bank, providing assurance that no errors or issues are brewing.

This comprehensive guide will explain the importance of regular bank reconciliation, walk through the standard reconciliation procedures, discuss tips and best practices, and outline how modern technology and accounting software can simplify the process. Avoiding headaches down the road makes routinely reconciling your accounts well worth the effort.

What Is Bank Statement Reconciliation?

Bank statement reconciliation is the process of cross-checking activity on your bank statement against your own transactions record and accounting ledgers. This ensures accuracy and identifies discrepancies like:

  • Transactions appearing in one place but not the other
  • Differences in recorded transaction amounts or dates
  • Fees charged you were unaware of
  • Unexpected interest earned or withdrawn
  • Unusual balances relative to your books

Typically performed monthly when you receive your statement, reconciliation provides an essential internal control for all bank accounts.

Why Reconcile Bank Accounts?

Key reasons for reconciling bank statements include:

  • Verify all transactions match your records to spot errors or missing items
  • Identify unauthorized or fraudulent activity requiring follow up
  • Compare calculated account balance to the bank’s reported balance
  • Ensure proper recording of transactions, fees, and interest in your books
  • Fix mistakes like duplication or incorrect amounts recorded
  • Detect checks showing as outstanding too long indicating they cleared
  • Highlight changes in account balances relative to budgets or projections

Catching issues early avoids major headaches like overdrafts, misreporting, and fraud down the road. The process acts as a verification checkpoint.

What Accounts Should Be Reconciled?

Every active deposit account should undergo periodic reconciliation, including:

  • Checking accounts where transactions occur frequently
  • High-activity savings accounts with many withdrawals
  • Accounts used for key business purposes like payroll
  • Accounts prone to fraudulent activity or security risks
  • Any account where you perform frequent transfers or deposits

Accounts with less activity may only require sporadic reconciliation such as quarterly or annually. But reconciling at least monthly provides ideal oversight.

When to Reconcile Bank Accounts

Statements can be reconciled as soon as they generate each month. Recommended timing includes:

  • Personal Accounts – Reconcile monthly when you receive your statement for best visibility. Can reconcile mid-month as well.
  • Business Accounts – Reconcile whenever statements are issued such as monthly. Some reconcile more frequently such as weekly.
  • Inactive Accounts – Reconcile at least quarterly since activity occurs infrequently.
  • New Accounts – Start reconciling the first 1-2 months to identify any errors upfront.

Set a recurring calendar reminder to reconcile on schedule. Consistent timing each period allows spotting irregularities.

How to Reconcile a Bank Statement in 5 Steps

Reconciling requires just a few procedures each cycle:

1. Gather documents – Have your latest statement, check register or accounting system transactions report, and any other account records handy.

2. Compare deposits – Match amounts and dates of deposits on the statement to your deposit receipts or recorded deposits.

3. Compare withdrawals and checks – Align statement withdrawals and processed checks with your recorded checks and transactions.

4. Compare fees, interest, and other adjustments – Verify any account fees, earned interest, or other credits align across both statement and your books.

5. Compare ending balances – Recalculate the ending balance for your records and validate it matches the bank’s reported ending statement balance.

Imbalances or unaligned transactions indicate something requiring follow-up. Otherwise, your books and bank agree.

Bank Reconciliation Red Flags

During reconciliation, watch for these red flags:

  • Transactions appearing only on your books or only on the bank statement, but not on both
  • Differences in the dollar amount of transactions recorded
  • Transactions dated differently between your records and the statement
  • Fees debited you were unaware of or cannot identify
  • Checks have not cleared after several months indicating they may be lost
  • Ending balances per your ledger differ from the bank’s reported balance
  • Anything highlighting questionable activity requiring additional review

Don’t assume discrepancies will resolve on their own. Research and address differences to determine the cause.

Best Practices for Smooth Reconciliation

Follow these practices for efficient and effective reconciliation:

  • Reconcile at consistent intervals each month to uncover issues quickly
  • Enter transactions carefully to avoid duplication or incorrect amounts
  • Record transactions promptly as they occur rather than batching later
  • Retain ATM, payment, and deposit receipts until the statement reconciles
  • Designate reconciliation duties to one trusted individual for accountability
  • Investigate and resolve reconciliation discrepancies immediately
  • Maintain thorough documentation of reconciliation procedures
  • Have someone periodically review reconciliations as added verification

With proper diligence and controls, reconciliation takes minutes and provides vital oversight.

Tips for Business Account Reconciliation

Best practices for reconciling business accounts include:

  • Performreconciliations at least monthly for all active accounts
  • Assign duties to someone independent from payment processing responsibilities
  • Review canceled check images online to match cleared checks efficiently
  • Monitor outstanding stale checks indicating potential issues
  • Watch for fraudulent electronic payments like altered ACH amounts
  • Tie payroll payments and tax liabilities to bank payments
  • Examine deposits and endorsements for irregularities
  • Implement controls like requiring secondary approvals for large disbursements

Frequent and rigorous reconciliation is key for early business financial oversight.

Using Accounting Software to Reconcile

Modern accounting software programs like QuickBooks simplify much of the reconciliation process:

  • Automatically import bank statement transaction data
  • Allow reconciling within the software
  • Provide filters to match transactions across books and statement
  • Identify gaps or variances between accounts
  • Generate custom reconciliation reports
  • Reduce manual data entry time

Look for appropriate controls within your system like approval workflows for certain transaction types, user roles and permissions, automated alerts for suspicious activity, and audit trails.

Reconciling Business Accounts With Multiple Users

With multiple employees accessing funds, reconciliation gets trickier:

  • Maintain a clear approval process for transactions like withdrawals and payments
  • Implement limits and controls around transfers initiated
  • Utilize accounting system logging of users, dates, and activity
  • Assign separate roles for payment initiation versus approval versus reconciliation
  • Require secondary sign-off for larger disbursements
  • Set up alerts on usage patterns that may indicate abuse
  • Watch for odd timing like weekend or late night activity

Proper controls, permission levels, and monitoring help minimize multi-user risks during reconciliation.

Reconciling Cash Activity and Deposits

Since cash payments and deposits lack paper trails like checks, take additional care reconciling:

  • Note details like the merchant, amount, date, and purpose in accounting records when making cash payments
  • Request detailed receipt at time of cash deposit for matching
  • If vague cash deposit details, trace back based on amounts deposited to infer likely sources
  • Watch for cash back amounts when reconciling debit card purchases
  • For businesses, reconcile cash receipts from point-of-sale systems to deposits

Lacking sources documents makes tracing some cash activity challenging. But reconciliation techniques like pattern monitoring help verify proper cash handling.

Reconciling Accounts With Cheque Fraud

If cheque fraud occurs, special steps help reconcile:

  • Notify bank of altered or forged checks to start fraud investigation
  • Request and review check photocopies to identify legitimate versus fraudulent items
  • Monitor outstanding checks for long durations potentially indicating future fraud
  • Place stop payments on outstanding checks showing anomalies
  • Change account numbers if fraud recurs across multiple statements
  • Strengthen internal cheque controls like safeguarding stock and securing signatures

Fraud always merits urgent response. But reconciliation often provides the first red flag something is amiss.

Correcting Errors Found During Reconciliation

If errors identified, typical fixes include:

Incorrect amounts – Make offsetting adjustments in your books or request corrected entries from bank.

Incorrect dates – Modify dates in accounting system records to align with bank.

Double payments – Record reversing entries and make bank adjustments.

Lost cheques – Request new cheque issuance and void original.

Unauthorized withdrawals – Report fraud to bank and monitor account.

Unrecorded fees – Add transactions to accounting system.

Unexplained differences – Research source documents and contact bank.

Surface-level reconciling balances is not the end goal. True diligence involves investigating and fixing discrepancies.

Automating Bank Reconciliation

Many small businesses and individuals opt to automate reconciliation through online banking tools, accounting software, or bookkeeping services. Benefits include:

  • Importing electronic statements into programs quickly without manual entry
  • Matching transactions automatically via advanced algorithms
  • Generating reconciliation reports with easy filtering to identify gaps
  • Tagging transactions discrepant between systems for review and handling
  • Providing audit trails on reconciliations performed

Automated matching and reporting reduces labor while increasing consistency. But humans still need to research flagged anomalies.

Key Controls to Ensure Accurate Reconciliation

To maximize reconciliation integrity:

  • Enforce mandatory vacations so fraud gets uncovered while staff is away
  • Institute system user controls like roles dictating access
  • Perform surprise periodic spot checks of reconciliations
  • Require secondary approval for large or irregular transactions
  • Rotate staff performing reconciliations periodically
  • Review historical reconcilements for odd patterns
  • Automatically flag dormant transactions exceeding time thresholds

Proper internal controls turn reconciliation from a compliance exercise into a vital fraud detection mechanism.

Reconciling Government Bank Accounts

For public entity bank accounts, best practices include:

  • Document detailed policies and procedures
  • Automate import of statement data
  • Reconcile within days of statement closing
  • Implement secondary review and approval controls
  • Maintain detailed audit trails
  • Segregate duties across payment approvers, processors, and reconcilers
  • Enhance oversight around transaction approval with clear limits and restrictions

Government accounts face heightened scrutiny requiring rigorous reconciliation practices and controls for public accountability.

The Bottom Line

While reconciliation amounts to simple periodic book-to-bank comparisons, consistently performing this vital process helps identify unauthorized activity, prevents growing discrepancies, ensures proper accounting, and gives peace of mind that your cash records are order. Transcribing errors happen, but catching them quickly through diligent reconcilement avoids major headaches. Invest the minutes upfront so you can sleep soundly knowing your accounts balance.

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